Hire charges paid for Millers and Rollers-Tax deductible under section 194-I

CIT Vs. D Rathinam-TCA No. 1282/2010 – (Madras High Court)

The assessee, hired Millers and Rollers, for the purpose of carrying out his road contract works. According to the revenue, since in the case on hand, the hire charges in respect of both the Millers and Rollers hired by the assessee contained a portion of labour charges incurred by the respective owners of the concerned vehicles/machineries towards operation of the respective vehicles/machineries along with labour and consequently, the relevant provision applicable for effecting TDS was section 194C and not 194-I of the Income Tax Act.

It is on the above said basis, the assessing officer as well as the commissioner (Appeals) took the view that, out of the total hire charges of Rs. 52,22,500, if 10 per cent is treated as charges paid towards labour element involved and the TDS not having been deducted as required under section 40(a)(ia) of the Income Tax Act, the whole of the sum of Rs. 52,22,500 was to be disallowed and consequently treated as income and liable to be taxed. The Tribunal, on the other hand, found that the sum of Rs. 52,22,500 paid by the assessee was only by way of hire charges for the Millers and Rollers taken on hire by the assessee and therefore, the relevant TDS provision applicable was only section 194-I and not 194C of the Income Tax Act, that the assessment year being 2005-06 and section 194-I providing for TDS even in respect of machinery/equipment was brought into the Statute book with effect from 1-6-2007, there was no scope to hold that the assessee committed any violation of sectin 40(a)(ia) of the Income Tax Act.

Held : The conclusion of the Tribunal, in having held that the relevant section which was applicable to the case on hand, in relation to the sum of Rs. 52,22,500 incurred by the assessee by way of hire charges, would fall under sectin 194-I of the Income Tax Act, is unassailable. Therefore, when indisputably section 194-I of the Income Tax Act came to provide for making the TDS in respect of machinery/equipments only with effect from 1-6-2007 and the relevant assessment year is 2005-06, there was no scope at all to find fault with the assessee for any violation of section 40(a)(ia) of the Income Tax Act.

FULL TEXT OF THE CASE IS AS FOLLOWS:-

The Commissioner Of Income Tax-I Vs D. Rathinam on 1 February, 2011

Tax Case (Appeal) No. 1282 of 2010

The Commissioner of Income Tax-I vs D. Rathinam

Tax Case Appeal against the order of the Income Tax Appellate Tribunal “C” Bench, Chennai dated 18.6.2010 passed in I.T.A. No. 1750/Mds/2008 for the assessment year 2005-06. For Petitioner : Mr. K.Subramaniam

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JUDGMENT

(Judgement of the Court was delivered by

F.M. IBRAHIM KALIFULLA, J.)

The revenue seeks to challenge the order of the Tribunal dated 18.6.2010 in I.T.A.No.1750 of 2008, in and by which, the Tribunal set aside the order of the Assessing Officer as well as that of Commissioner of Income Tax (Appeals). The assessment year pertains to 2005-2006. The revenue seeks to raise the following question as substantial question of law. “Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in deleting dis allowance of Rs.52,22,500/- made under Section 40(a)(ia) of the Income Tax Act made on the ground that the assessee had not deducted tax at source on the payments made to the Miller charges and road Roller hire charges as required under Section 194C of the Act.”

3. The issue relates to alleged default committed by the respondent- assessee in making the TDS in respect of the hire charges paid by the respondent  assessee, for having hired Millers and Rollers, for the purpose of carrying out his road contract works. According to the revenue, since in the case on hand, the hire charges in respect of both the Millers and Rollers hired by the respondent- assessee contains a portion of labour charges incurred by the respective owners of the concerned vehicles/machineries towards operation of the respective vehicles/machineries, it was a composite contract of hiring of vehicles/machineries along with labour and consequently, the relevant provision applicable for effecting TDS was Section 194-C and not 194-I of the Income Tax Act. It is on the above said basis, the Assessing Officer as well as the Commissioner of Income Tax (Appeals) took the view that, out of the total hire charges of Rs.52,22,500/-, if 10% is treated as charges paid towards labor element involved and the TDS not having been deducted as required under Section 40(a)(ia) of the Income Tax Act, the whole of the sum of Rs.52,22,500/- was to be disallowed and consequently treated as income and liable to be taxed.

3. The Tribunal, on the other hand, found that the sum of Rs.52,22,500/- paid by the assessee was only by way of hire charges for the Millers and Rollers taken on hire by the respondent – assessee and therefore, the relevant TDS provision applicable was only Section 194-I and not 194-C of the Income Tax Act, that the assessment year being 2005-06 and Section 194-I providing for TDS even in respect of machinery/equipment was brought into the Statute Book with effect from 1.6.2007, there was no scope to hold that the respondent  assessee committed any violation of Section 40(a)(ia) of the Income Tax Act.

4. Having heard Mr.Subramaniam, learned Senior Standing Counsel for the appellant and having perused the order of the Assessing Officer, the Commissioner of Income Tax (Appeals) as well as that of the Tribunal, we are convinced that the conclusion of the Tribunal was well justified.

5. The learned Standing Counsel in his submissions contended that the conclusion of the Commissioner of Income Tax (Appeals) in having treated 10% of the total sum paid by way of hire charges towards labour element and the consequential conclusion that the non-deduction as required under Section 194-C of the Income Tax Act would necessarily result in addition of the entire sum of Rs.52,22,500/- by invoking Section 40(a)(ia), cannot be found fault with.

6. When we perused the order of the Commissioner of Income Tax (Appeals), in paragraph 3 of its order dated 23.6.2008, the Commissioner of Income Tax (Appeals) has quoted, as a matter of fact, what was paid to the various individuals and who own the Millers and Rollers taken on hire by the respondent-assessee, were the respective hire charges. Neither the Assessing Authority nor the Commissioner of Income Tax (Appeals) could assert that there was any material to suggest that there was any contract between the respondent-assessee and those individuals, by way of a composite contract for labour as well as hiring of the vehicles. Thus, it cannot be disputed that the respondent-assessee as a contractor for laying of the road engaged his own men for that purpose. Hiring of the miller and roller as a machinery/equipment was apparently needed for the purpose of carrying out the contract of laying of the road. Both the equipments viz., Millers and Rollers had to be necessarily operated by the owner of the respective machineries/equipments. Therefore, that by itself cannot be a ground to state that it was a composite contract for supply of labour in the course of hiring of machineries/equipments. Inasmuch as the Millers and rollers have to be necessarily operated and maintained by the respective owners, the engagement of the service of any person for operating those machineries/equipments would have been purely an incidental one. In fact, as stated by us earlier, there was no material evidence or statement of any one to say in definite terms that the supply of such Millers and Rollers were along with its respective operators. Therefore, in the absence of any such acceptable material, the conclusion of the Assessing Officer in treating the hiring of Millers and Rollers as one falling under the category of sub-contract for provision of Labour or the conclusion of the Commissioner of Income Tax (Appeals) that atleast 10% of the total payment of Rs.52,22,500/- would have been incurred by way of labour charges by the respective owners, cannot be accepted.

7. Viewed in that respect, the conclusion of the Tribunal, in having held that the relevant Section which was applicable to the case on hand, in relation to the sum of Rs.52,22,500/- incurred by the respondent  asseessee by way of hire charges, would fall under Section 194-I of the Income Tax Act, is unassailable. Therefore, when indisputably Section 194-I of the Income Tax Act came to provide for making the TDS in respect of machinery/ equipments only with effect from 1.6.2007 and the relevant assessment year is 2005-06, there was no scope at all to find fault with the respondent  assessee for any violation of Section 40(a)(ia) of the Income Tax Act.

8. Apart from the above conclusion based on facts, the Tribunal has also stated that when the basis for the assessment was by way of applying the net profit rate on gross receipts, there was no scope for making any other addition, in view of Section 44AD of the Income Tax Act, which was accepted by the department. In this respect, we find every justification in the grievance expressed by the learned Standing Counsel that Section 44AD will not apply, if the total turnover or gross receipts in the previous year exceeds Rs.40 lakhs. In the case on hand, the income of the assessee from contract business at the rate of 8% of the contract receipts, was determined at Rs.14,48,480/-. Therefore, the contract receipts would have far exceeded Rs.40 lakhs and therefore, there was no scope to hold that Section 44AD shall have application to the case of the respondent  assessee.

9. Since on the main issue, the Tribunal has held that Section 194-I was the relevant provision applicable to the case of the respondent  assessee, we have no hesitation to hold that the other reasoning of the Tribunal on Section 44AD should be ignored, in the light of the statutory limitation noted by us as above. Therefore, we do not find any scope to entertain the question of law. The appeal, therefore, fails and the same is dismissed. Tr/

To

1. The Income Tax Appellate Tribunal, “C” Bench, Chennai.

2. Commissioner of Income Tax (Appeals), Trichirappalli.

3. Assistant Commissioner of Income Tax, Circle II, Trichy